Q&As
Are loans normally assigned or novated? Does it matter?
Summary
Both Assignments and Novations of Loan contracts are common. As they have different effects, limitations and risks, whichever mechanism is suitable depends on the purpose and requirements of the transaction. The fundamental difference is that assignment allows the transfer of rights (but not obligations) from one party to another without the consent of the borrower, whereas novation is the extinction and replacement of rights and obligations under a contract with a new agreement and with different parties. It does therefore require the agreement of the borrower.
Assignment
A detailed discussion of assignment is beyond the scope of this note. However, for the purposes of contrasting assignment and novation, the following are the key points.
Types of assignment
There are two types of assignment: (i) legal assignment under s. 136 of the Law of Property Act 1925 (LPA), which imposes formal requirements; and (ii) equitable assignment which is not subject to these requirements.
What rights may be assigned?
The general rule is that a presently owned right (eg
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